Rav Chaim of Volozihin in his classic work "Nefesh Hachaim" laments the Chasidic understanding of G-d. They say that Hashem is in EVERYTHING.
He explains his opposition based on the fact that the Torah is based on good and evil, pure and impure etc. If EVERYTHING is G-dliness then you fudge all distinctions between good and evil. One might even come to think about Torah in dirty places.
Rav Chaim introduced the concepts of סובב כל עלמין and ממלא כל עלמין. The latter term means that Hashem's presence fills the world. This is correct, says Rav Chaim. He does. But that is only from HIS perspective. From our perspective Hashem is only סובב כל עלמין - He WATCHES over the world but there is a clear demarcation line between good and evil, pure and impure. That means that PRATICALLY SPEAKING, we must view Hashem as סובב and not ממלא.
Hashem is הקדוש ברוך הוא - Kadosh is נבדל [separate] while Baruch means that He influences the world with his blessing.
In philosophy this is called immanent and transcendent. Hashem is both. From our perspective we view Him as primarily transcendent but the absolute truth is that He is immanent as well.
There is a concept in Kabbalah called קו and another more well known concept called צמצום [contraction] The concept of קו is that there are differeing LEVELS of G-dliness in the world. צמצום means [according to R' Chaim] that Hashem hides Himself even though He is equally everywhere. It is kefirah [according to Rav Chaim] to believe in the concept of צמצום according it's simple meaning, that Hashem contracted Himself to make room for the world. How can one say this? Hashem is here, Hashem is there, Hashem is truly everywhere! So צמצום is Hashem hiding Himself despite His ubiquitous presence. [For all of the above see נפש החיים שער ג].
The only exception is Torah. Torah brings the notion of ממלא כל עלמין to light [pun intended]. The kedusha of the Torah remains with it's original shine but even there is a צמצום that took place in order to allow us to perceive it with our limited faculties. Here the צמצום is for the sake of גילוי – to reveal the G-dliness in the world. But the physical world must be viewed by us as having varying levels of purity and impurity. Thus, one may not think of Torah in filthy places.
Rebbe Tzadok Hakohen explains צמצום differently. According to R' Tzadok, ALL of צמצום was intended to hide in order to reveal. So even our physical world reveals G-dliness.
כי באמת עצם אור ה' גדול מאוד ואי אפשר להיות מושג ללב בני אדם כלל כמו שכתוב "כי לא יראני האדם וחי", וזהו תואר הקב"ה הוראת קדושה בכל מקום הבדלה שהוא נבדל מבני אדם, והיינו אור ה' הנבדל מלבות הישראלי. ולפי שרצה יתברך שמו שישיגו הנבראים מאורו צמצם יתברך הארתו שתהיה מוגבלת ומצומצמת ולא בתוקף וחוזק כל כך והוא כח אור שכינתו יתברך בתוך לבבות בני ישראל.
[דובר צדק עמוד ב]
The upshot is that we have to serve Hashem with all of the physicality of this world because Hashem resides here. We shouldמ't be confused by the illusion of phyiscalty which is just a veil for Hashem and obscufates our vision. Writes Rav Zeev Wolf of Zhitmor [Ohr Hameir p. 184]
כי כלל זה נקוט בידך ואל ימוט מנגד עיניך אפילו כמעט רגע שאין שום דבר בעולם שלא יהיה שם התלבשות השכינה השוכנת בתוכם להחיותם, אל יתן אל לבו לראות גשמיות הדברים כי אם אלקות המלובש וגנוזה לשם.
The pasuk says אנכי עומד בין ה' וביניכם which means that moshe is standing between us and Hashem. But Chasidus teaches that it also means that one's ego, the אנכי, stands between us and Hashem. We have to learn to nullify ourselves [ביטול היש] and thereby find Hashem.
When we say Shema our kavvana is that NOTHING ELSE EXISTS in this world for real, outside our our G-dly neshamos.